Eurozone banks paid dividends to the detriment of lending: BIS economist
Eurozone banks continued to pay out generous dividends despite the region's crisis, ultimately to the detriment of lending, the head of research at the Bank of International Settlements said Thursday.
Well-capitalised banks are able to lend at more advantageous conditions, said Hyun Song Shin in presenting research at a conference in Frankfurt organised by the European Central Bank.
However eurozone banks have in recent years chosen paid out considerable amounts to shareholders instead of using the funds to boost their capital and be in a better position to increase lending.
"Banks have paid out substantial cash dividends, even in those regions where bank lending may not be sufficient to support recovery of economic activity after the crisis," said Shin according to a transcript provided by the BIS.
He examined the retained profits and dividends paid by 90 eurozone banks between 2007 and 2014.
While their retained profits hit 261 billion euros during this period, they paid out 196 billion in dividends to shareholders.
"This means that the retained earnings of these banks would have been 75 percent higher in 2014, had the banks chosen to plough back the profits into their own funds rather than paying them out as dividends," said Shin.
In certain countries such as Spain, France and Italy, the retained profits could in fact have been double their level at the end of 2014 if banks had not paid out dividends to shareholders.
French banks paid out 45 billion euros to shareholders during this period, while retaining only 26 billion euros.
"This should be of concern to central bankers," said Shin, whose research found that the more of their own funds that banks had, the lower their costs to borrow funds and the faster they expanded lending, thus potentially generating more profits.
Sluggish lending by banks is viewed as being one of the key factors holding back the eurozone's economic recovery, and the ECB has taken a variety of measures to encourage banks to issue more credit.
Shin noted a possible convergence of interests between shareholders and executives as to why eurozone banks have been reluctant to retain earnings.
Dividends are a short-term measure for shareholders to unlock the value of their investment, while lower capital makes it easier for executives to meet their targets for return on equity.
"These private motives are reasonable and readily understandable, but if the outcome is to erode capital that serves as the bank's foundation for lending for the real economy, then a gap may open up between the private interests of some bank stakeholders and the broader public interest," he said.
The BIS spearheaded a global effort following the global financial crisis to require banks to hold more capital so they could better absorb losses and wouldn't need to be bailed out by taxpayers.
While banks have been raising their capital ratios, there have been concerns they have been doing it by selling off assets.
© 2016 AFP